Biotech ETFs Flying High, And Higher …


Four biotechnology-focused ETFs were among the top-10-performing ETFs in the first half of 2012, as the research-driven entrepreneurial slice of the health care industry outperformed the rest of a sector that many have been betting would shine brightly anyway.

The demographic backdrop of aging populations around the developed world, plus the prospect of “Obamacare” delivering upward of 30 million new patients, has helped fuel health care equities. Add to that the mergers and acquisitions potential that many successful biotech companies present as their latest cures catch the attention of “big pharma,” and you have the recipe for rocketing returns.

The First Trust NYSE Arca Biotechnology fund (FBT - News) outperformed all the other biotechs in the first six months of 2012, rising in value by more than a third, making it the second-best-performing U.S.-listed ETF behind the construction ETF “ITB,” which we wrote about separately . Since the end of the quarter, FBT has tacked on more gains, and is now up more than 37 percent for the whole year.

“Biotech is a high-beta play in the health care space,” said Paul Weisbruch, an ETF trader at King of Prussia, Pa.-based Street One Financial.

“There’s a lot of M'A activity going on in biotech,” he added, noting the small hole-in-the-wall labs that come up with promising pharmaceuticals are huge growth opportunities for big drug companies looking to replenish their product pipelines.

Equal-Weighted Reigns

Look more closely at FBT and another biotech ETF right behind it that was the third-best performer in the first half, and things get more interesting.

Both FBT and the SPDR S'P Biotech ETF (XBI - News)—which returned 33.24 percent in the first half—use equal-weighted indexing strategies.

Equal-weighted funds invariably allocate more of their portfolios to smaller companies and that, in turn, means funds with higher-risk/higher-return profiles.

So, it’s no surprise that right now, high-beta funds like FBT and XBI are flying high. For the record, FBT has a beta of 1.22 and XBI has a beta of 1.25, according to IndexUniverse ETF Analyst Dennis Hudachek. That essentially means they are going to move more than the market.

That, of course, works both ways, so high-beta funds such as FBT and XBI are likely to fall the hardest when that day comes.



Cap-Weighted Entries

Investors concerned about the hazards of owning high-beta funds need look no further than the two other biotech funds that made it onto IndexUniverse’s top-performing ETFs list for the first half.

Those are the Market Vectors Biotech ETF (BBH - News), which jumped almost 30 percent in the first half, and the iShares Nasdaq Biotechnology Index Fund (IBB - News), which added almost 25 percent to its price. They were No. 6 and No. 10 on the first-half top-performers list.

Both BBH, one of the former HOLDRs that Van Eck turned into ETFs last year, and IBB are market-cap-weighted funds that tend to hold larger companies than either FBT or XBI.

IBB’s beta is 1.05, which explains in part why it hasn’t returned as much as the two equal-weighted strategies. But both cap-weighted ETFs have continued marching higher in the early sessions of the second half, with IBB and BBH now up, year-to-date, 26 percent and 35 percent, respectively.

It follows that because they have relatively low betas, both IBB and BBH are also likely to have a less abrupt move downward should the market reverse.

But for now, biotech seems to be marching to the beat of its own drum, barely affected by whatever ails the eurozone, the broader U.S. economy and the emerging markets .

The rally will end one day—perhaps in a spectacular bubble—but that day isn’t yet in sight.

Top 10 Performers YTD (Excluding Leveraged and Inverse as well as 2012 launches)

Ticker Name YTD TRR YTD Flows ($,M) AUM ($,M)
ITB iShares Dow Jones U.S. Home Construction 41.86 242.17 806.84
FBT First Trust NYSE Arca Biotechnology 34.14 6.17 249.95
XBI SPDR S'P Biotech 33.24 76.13 641.43
EGPT Market Vectors Egypt 32.88 -5.64 41.37
TUR iShares MSCI Turkey Investable Market 29.81 -34.71 406.83
BBH Market Vectors Biotech 29.43 21.47 105.89
EPHE iShares MSCI Philippines Investable Market 27.56 52.86 143.66
VNM Market Vectors Vietnam 26.25 59.93 301.30
XHB SPDR S'P Homebuilders 25.72 264.43 1,361.99
IBB iShares NASDAQ Biotechnology 24.75 212.64 1,962.16

Bottom 10 Performers YTD (Excluding Leveraged and Inverse as well as 2012 launches)
Ticker Name YTD TRR YTD Flows ($,M) AUM ($,M)
KWT Market Vectors Solar Energy -29.27 -4.15 0.63
GLDX Global X Gold Explorers -29.12 13.88 28.08
JO iPath Dow Jones-UBS Coffee Total Return ETN -27.76 9.47 27.06
CAFE iPath Pure Beta Coffee ETN -26.47 1.00 2.42
ARGT Global X FTSE Argentina 20 -26.36 0.00 2.84
TAN Guggenheim Solar -25.75 13.52 50.25
UNG United States Natural Gas -25.35 284.41 1,117.03
CTNN iPath Pure Beta Cotton ETN -23.95 1.05 2.47
KOL Market Vectors Coal -23.94 -96.40 174.70
GDXJ Market Vectors Junior Gold Miners -22.23 722.03 2,120.45


Permalink | ' Copyright 2012 IndexUniverse LLC. All rights reserved

More From
View Comments (0)